Chevron places a big bet in the GulfOil giant planning floating city of deep-water wells 280 miles out

BRETT CLANTON, HOUSTON CHRONICLE |
October 20, 2010

Chevron's planned $7.5 billion project to develop deep-water reservoirs in the Gulf's Jack and St. Malo fields will include three undersea centers feeding a single production hub.

Chevron Corp. has approved a $7.5 billion project to develop two deep-water fields in the outer rim of the Gulf of Mexico, marking one of the oil and gas industry's biggest investments ever in the U.S. offshore area and a big vote for the future of the region after the BP oil spill.

The decision on the Jack and St. Malo fields, which comes seven years after the first discovery there, sets in motion a sweeping effort to design and build a massive floating city about 280 miles southwest of New Orleans that is expected to produce its first barrels of crude oil in 2014.

It also represents a major step forward in a highly touted frontier region of the Gulf, which has been hailed as the biggest domestic discovery since Alaska's Prudhoe Bay a generation ago.

But as Chevron's project illustrates, there is nothing easy about operating in the remote area. Not only are the fields beneath 7,000 feet of water and as much as four additional miles below the sea floor, they are in ancient rock layers that are still not well understood by industry.

"This one, by and large, is going to be our biggest and most complex undertaking in our history in the U.S. Gulf of Mexico," said Gary Luquette, the company's chief of North American exploration and production, in an interview with the Houston Chroniclein advance of today's official announcement.

To make the project feasible, Chevron and its partners are building a giant facility that will function as a single hub for the fields — located 25 miles apart - with the capacity to produce 170,000 barrels of crude oil per day and 42.5 million cubic feet of natural gas per day. It will tie in production from three clusters of pumps and other equipment on the seafloor that will help suck oil and gas from the deep formations and send it to the platform above.

Built with growth in mind

As such, it will closely resemble Shell's Perdido hub, which in March became the first offshore facility to begin production in the ancient rock layers - deposited from 35 million to 65 million years ago - referred to by scientists as the Lower Tertiary trend.

But unlike Perdido's cylindrical floating spar design, the Jack-St. Malo structure will be a more substantial semi-submersible facility, akin to BP's Thunder Horse platform in the Gulf of Mexico, the largest production facility of its kind ever built, Luquette said. And it will be built with growth in mind.

"With discoveries in the area by either Chevron or other operators, there may be an opportunity to expand that capacity in the future and serve as a host facility for third-party production," Luquette said.

The Lower Tertiary, which runs deep below the seafloor in what is roughly a 300-mile band on the outer edge of the U.S. Gulf between Texas and Louisiana, has been a hotbed for major discoveries in recent years by Chevron, BP, Shell and others.

Nineteen discoveries have been announced, with 14 of them containing more than 100 million barrels of recoverable oil and gas equivalent, said Leta K. Smith, director of IHS CERA's E&P Trends Forum in Houston.

"The whole thing totals about 4.2 billion barrels now that's been discovered and that's recoverable," Smith said. "That's what they've found so far. There may yet be others."

The Jack and St. Malo fields alone contain in excess of 500 million oil-equivalent barrels of recoverable resources, Chevron estimates.

Though it won't make the U.S. energy independent, production from Lower Tertiary fields is expected to help offset declines in shallow-water fields and lift overall output of the Gulf of Mexico, which today accounts for about a quarter of domestic oil production. And the success there underscores how improved drilling and geologic imaging technology is helping oil companies put more complex fields in play - sometimes just barely.

Lower Tertiary formations are so dense that Chevron expects to recover as little as 10 percent of the oil in place. Conventional reservoirs have recovery rates of 25 percent to 50 percent, Luquette said. But he hopes improved technology will help boost output over time.

Lower Tertiary formations are so dense that Chevron expects to recover as little as 10 percent of the oil in place. Conventional reservoirs have recovery rates of 25 percent to 50 percent, Luquette said. But he hopes improved technology will help boost output over time.

Chevron announced the discovery of the Jack prospect in September 2004. Unocal Corp. announced discovery of the St. Malo prospect in October 2003. The latter field came under Chevron control in 2005 with the $20 billion merger of the two California oil companies.

From the start, the companies knew the fields were huge. But it wasn't until 2006 that a headline-grabbing well test at Jack confirmed the tight formations could achieve flow rates high enough to justify commercial development.

Even then, however, questions remained about the massive investments required to bring fields into production and technology gaps that must be overcome.

'Moving beyond the hype'

Chevron's final investment decision at Jack-St. Malo suggests early doubts have been answered and that "we're moving beyond the hype," Luquette said.

There have been recent obstacles. The project was affected by the Interior Department's temporary moratorium on deep-water drilling, enacted after the April 20 blowout at BP's Macondo well that killed 11 workers and launched that nation's worst oil spill.

Chevron's plan calls for 10 producing wells - four at Jack and six at St. Malo - but the moratorium delayed some drilling at the site. The setback won't affect the timing of the first oil target date in 2014, but could mean fewer wells are available for production at start-up than initially planned, Luquette said.

While the moratorium was lifted this month, confusion around new offshore safety and environmental regulations likely will stall approval of new drilling permits for a number of operators, said Raoul LeBlanc, senior director of PFC Energy's financial advisory group in Houston. "In our view, the actual delay for projects is going to be a year," he said.

But it's a small hitch in a project that Chevron envisions will yield up to 40 years of oil and gas production. In fact, company officials are already using a shorthand reference for the current development plan: stage one.